Net Neutrality? There's No Such Thing.

For starters, among economists, even those of a more institutional persuasion, the idea of licensing is considered inefficient. The economist Ronald Coase proposed that, as for other resources (such as land and metal), the market should regulate the use of the radio spectrum: with well-defined property rights, the free market will allocate resources to their most efficient use. Then, we all know how public-service broadcasting turned out: its programs usually consist of vintage features, and its commercial breaks disrupt every program. No wonder consumers are willing to pay more for nonpublic channels like HBO, or switch altogether to disruptors of broadcasting like Netflix.

Here, again, the point becomes obvious: the very regulation aiming at neutrality lowered the level of service by neutral providers while creating the potential for discrimination. There is, however, a third argument against this analogy. While the radio spectrum is somewhat limited, broadband is expandable. Those firms whose business model is running the net create broadband. Their return on investment is on the provision of infrastructure and less on the usage of existing systems. So, here again, the analogy misses the important points—points that would deeply affect the web.

The mall comparison: There is more to this image than the apparent irony of the web driving shopping malls out of business. Usually, a developer-manager sets up a shopping mall envisaging renting space to individual shops, restaurants and other services. While it is in the interest of the developer-manager to offer a diversity of goods, attractions and price categories, the mall is not a public service. And not every business can set up shop there. Indeed, businesses compete for space and pay a price for it.

Most developers-managers also use other criteria in adjudicating space than just price; for example, there are reserved spaces for seating, for childcare or for parking—all of them free and nondiscriminatory. A shopping mall is therefore a mix of discriminatory and nondiscriminatory spaces, and even in the non-neutral spaces there is not only a race for price, but for diversity. All these factors make the mall attractive. Most important of all: the mall developer-manager is a private entity that set up the mall in order to generate economic benefits. And selecting who sets up shop is a very important aspect of the mall’s success.

The same principles apply to the companies that build and manage the internet’s infrastructure. They are private entities investing in a space they want others to use. Naturally, they also want to generate revenues from it. It is in their interest to make their space attractive, by allowing a diverse mix of offerings, but also by sorting out how these offerings operate. Yes, there is a considerable portion of management of that infrastructure—be it DSL, broadband, point-to-point or something else—and management is always, to some degree, discretionary. Good management, however, is rule-based and eventually, the rule of discretion becomes known to the stakeholders. It is then up to the stakeholders to decide whether to use that one mall (or broadband provider) or to switch to the competition. Yes: competition between internet infrastructures (DSL, broadband, point-to-point and things to come) is reality nowadays. And it will become even fiercer as the costs of building broadband, as well as the costs of its alternatives like direct, are rapidly decreasing.

What do these metaphors show us? Getting the right comparison is important. If there is need for an image of the web, this image cannot be drawn from the aspects one might like while at the same time disregarding all the others. A good metaphor tries to reproduce the dynamics of the system. The shopping-mall comparison is superior to the highway metaphor and the broadcasting analogy because it gets the dynamic of the internet right. This dynamic is business-driven, because it is set up by for-profit private businesses. And the dynamic is not neutral. But it is exactly the rule-based non-neutrality of that dynamic that makes shopping malls and the internet attractive to investors and users.

Getting Economics Right

The most important mistake of the highway metaphor and the broadcast analogy is that they consider the internet to be a public good. But it is not. It is private, developed by private entities, maintained by private firms and especially paid by private agents, be they content generators or end users. Treating the net as a public good is a severe misunderstanding of its economics. More than it, it leads to even worse policy proposals. That is why it is important to get the economics of public goods—and of the internet as a private good—right.